HashKey is trying to change the current dominance of unlicensed cryptocurrency exchanges in the cryptocurrency industry.
By Zhou Zhou, Foresight News
"I only realized that I had been appointed as the new CEO after seeing the internal email," said Livio (Weng Xiaoqi), CEO of HashKey Exchange.
On January 3, 2024, an internal email from HashKey officially announced Livio as the new CEO of HashKey Exchange. In response, Foresight News contacted Livio and conducted a public interview with him on Twitter Space.
During the interview, Livio comprehensively reviewed the numerous challenges faced by HashKey Exchange in 2023 and revealed the macro goals of HashKey Exchange for 2024. In addition, he not only shared his own journey in cryptocurrency but also discussed the progress of HashKey Exchange in potential cryptocurrency tracks such as RWA, ETF, and stablecoins.
Weng Xiaoqi believes that "new tracks" and "new narratives" such as RWA, ETF, and Hong Kong dollar stablecoins are natural opportunities and stories for licensed cryptocurrency exchanges, making it difficult for unlicensed institutions to participate. This also presents an opportunity for licensed cryptocurrency exchanges to outperform unlicensed ones.
Is a licensed cryptocurrency exchange a good business?
Foresight News: Happy new year, welcome to the first Foresight News Twitter Space of the new year. This time we have invited Livio, the new CEO of HashKey Exchange. This is also Livio's first appearance after being announced as the new CEO on January 3 by HashKey. First of all, congratulations to Livio.
Livio: Thank you, and I wish everyone a happy new year. This year is expected to be a bull market in the cryptocurrency industry, and I wish everyone a good harvest this year.
I did indeed only realize that I had been appointed as the new CEO after seeing the internal email. In the past, I have been working on various tasks at the regulatory exchange as the group's COO. In 2023, HashKey Exchange made a lot of progress, and I am grateful for everyone's continued attention.
Foresight News: Previously, we mentioned the success of the U.S. compliant cryptocurrency exchange Coinbase, which largely stems from its strong fundamentals as a U.S. cryptocurrency exchange, allowing it to reach hundreds of millions of U.S. users. However, with a population of only about 7 million in Hong Kong, could this become a ceiling for HashKey Exchange? What work has HashKey Exchange done in expanding into the international market?
Livio: In the past year, I have also resolved my own confusion, that is, whether licensed cryptocurrency exchanges in Hong Kong can be profitable. The phased achievements we have made in the past year have answered my own questions.
First, our current customer base is roughly half from the Hong Kong market, and the other half comes from global users.
In the Hong Kong market, there are two types of users: retail users and large institutional users, such as listed companies on the Hong Kong Stock Exchange. We have disclosed many such collaborations, as well as traditional financial institutions in Hong Kong that are friendly to cryptocurrencies, such as fund companies and securities companies.
The other half comes from global users, with a significant portion being global Chinese users. Western cryptocurrency exchanges are not entirely user-friendly for Chinese users, as their service types are more focused on the experience of Westerners. For example, if you encounter a problem with development and send them an email, it may take one or two weeks to receive a reply. Chinese users are accustomed to having an online customer service system where they receive immediate responses. Therefore, overseas Chinese users make up the other half of our market.
Additionally, users from regions such as Southeast Asia and India, where the market is quite active, are also an important part of our user base. Therefore, we have already been laying out our internationalization, directly supporting participation in trading from 16 countries and regions.
In addition to the license in Hong Kong, HashKey has obtained a cryptocurrency exchange license in Japan, and we are actively expanding in Singapore. Furthermore, we have actually obtained another very important license globally, but due to regulatory reasons, we cannot disclose it yet. We are expected to officially disclose it in the next two months, so I will give you a preview.
Foresight News: Licensed cryptocurrency exchanges are considered the new generation of cryptocurrency exchanges, what are the differences between them and the previous unlicensed cryptocurrency exchanges?
Livio: The main differences may lie in several points. The first difference is whether a cryptocurrency exchange relies on human trust or on mechanisms or legal systems. In the past, unlicensed exchanges relied on the credit of institutional agents, and the security of users' assets depended on the credit of the founders and their ability to withstand risks.
We have seen many exchanges running away in the past, many of which failed to withstand risks, such as SBF. Many unlicensed cryptocurrency exchanges have risks and certain exposures, and if certain situations arise, they are very likely to go bankrupt.
The assets of users on licensed exchanges are independently custodied by licensed entities, and they have an independent Trust or Company Service Provider (TCSP) license. Their operations are fully transparent and subject to independent audits by third-party audit firms. For example, HashKey Exchange has been audited by three of the Big Four accounting firms. KPMG is responsible for our external independent audit, PwC is responsible for our internal group audit, and EY is responsible for our technical audit. The entire operation process is fully transparent. Therefore, the company's activities cannot have any tricks, otherwise it would violate Hong Kong regulations and could even lead to imprisonment.
In the past, various exchanges had many different operating methods, many of which often harmed the interests of users, which licensed cryptocurrency exchanges absolutely would not do. Because we are a licensed institution, the treatment of licensed institutions in the entire financial industry is different. The biggest difference is that, as a licensed institution, the banking industry in Hong Kong and globally easily accepts us, so cooperation has been very smooth. We have opened custodial accounts with various mainstream banks, which can support the legal and compliant inflow and outflow of balances in bank accounts, without worrying about issues such as frozen cards when depositing or withdrawing funds on unlicensed cryptocurrency exchanges, or the need to use OTC.
Another difference is that we can directly open fiat currency trading pairs. Due to policy changes in 2017, everyone was forced to use stablecoins such as USDT. However, using stablecoins has a problem: whether the asset allocation behind it is 1:1, and people are concerned about the risk of stablecoins collapsing. On HashKey, you can directly purchase cryptocurrencies with Hong Kong dollars and U.S. dollars, such as BTC/HKD and BTC/USD. This allows many users who are afraid of or have concerns about stablecoins to avoid the risks associated with stablecoins.
Of course, we have just mentioned some of the advantages of licensed cryptocurrency exchanges. There are also some practical aspects, such as the relatively more complicated account opening process and a relatively limited selection of assets. It can be said that both licensed and unlicensed exchanges have their pros and cons. However, for mainstream assets, especially cryptocurrencies like Bitcoin and Ethereum, which are favored by those seeking stability, they are very suitable for trading on compliant exchanges.
This is the understanding within the existing framework. Beyond the existing framework, compliant exchanges may play a very different role in the next few years. For example, the RWA track, which has been very popular in the past year, is essentially the issuance of security-type tokens, which only compliant exchanges can do. If non-compliant exchanges do it, it is considered illegal issuance of securities, which is a criminal offense in various countries.
The license allows licensed cryptocurrency exchanges to do a series of things that traditional financial institutions could do in the past, and this has led to the emergence of new business forms. Therefore, there is a lot of imagination in this area.
Foresight News: Unlicensed cryptocurrency exchanges have many sources of revenue and substantial income. They can engage in contracts and derivatives, which can be considered highly profitable businesses. However, licensed cryptocurrency exchanges face many restrictions in this regard, and many businesses cannot be expanded. Will this create significant pressure on revenue and profitability?
Livio: This is another very real issue. All licensed cryptocurrency exchanges in Hong Kong may have to endure several years of hardship without very good income. Many teams in this process found that their income did not fully match their expectations, and then gave up. Currently, we may be the only ones who have emerged from this predicament.
We are expected to break even this month. There is indeed pressure on our marketing, but we are optimistic about overcoming this difficulty, especially in the anticipated bull market, and reaping the benefits of this bull market, entering the next new phase.
HashKey Exchange in 2023 and 2024
Foresight News: What challenges did you face in 2023 that were particularly troublesome for you?
Livio: The various hardships of the past year are still vivid in my memory. It's important to note that HashKey is not known for its exchange business. HashKey Capital and HashKey Cloud (ETH staking) are both at the forefront in their respective fields, even industry leaders. However, in the exchange business, we did not have much experience.
So the first problem I encountered was internal: whether the team had the capability. Also, because of my arrival, we attracted a large number of core talents from top exchanges. Of course, many talents joined HashKey because they believed in the future of compliant cryptocurrencies. So, we quickly resolved the first issue, which was the lack of team capability.
The second issue was that our technical system was not sufficient. Because in the past, the system development was mostly done by traditional internet companies or from the traditional financial market. We had too little technical accumulation of our own. So, we quickly assembled a technical team and used the latest engines and technical solutions to quickly develop a system. Currently, this system has been running smoothly for over half a year, and has successfully handled the challenge of tens of billions of dollars in daily trading volume without any incidents, which exceeded our expectations.
The third issue was the lack of external environment, especially in regulation. This is a completely new track, and regulation tends to take a conservative or prudent view of the industry. We had to feel our way with the regulators, and through our efforts, we gained each other's trust and gradually obtained more green lights to do more. So, the process of adaptation is also very important.
In fact, many participants, including some of our investors and partners, had a big question mark about whether early licensed exchanges could have market influence. Especially since there have been no particularly successful cases of licensed cryptocurrency exchanges globally. For example, Japan, Indonesia, and Thailand have not seen particularly successful licensed cryptocurrency exchanges. And generally, compliance is seen as slow progress and not profitable. However, the goals we achieved and the data we reached last year actually gave our partners a strong confidence.
Of course, there are differences between compliant tracks and licensed tracks. For example, in the U.S., Coinbase has achieved considerable success in business, but they can only be called a compliant exchange, not a licensed exchange. This is because they did not obtain a federal-level license in the U.S., and mostly used regulations from the Commodity Futures Trading Commission. This is also why they have faced many accusations from the SEC for assets being considered securities, essentially because they are not licensed. We hope that by the end of 2024, we can speak with more confidence and completely break the industry's stereotype of licensed cryptocurrency exchanges.
Foresight News: You mentioned some good data performance and achievements. Which ones do you think are particularly significant?
Livio: After obtaining the license at the end of 2022, we entered a stage of preparation and formal product release in 2023. There are several key milestones that I think are worth noting: On August 28, we officially implemented our trading service system, and on November 1, we released the first licensed virtual asset exchange APP in Hong Kong. These two milestones are very important.
Looking back at the whole year, our achievements include releasing the first licensed virtual asset exchange APP, becoming the first and possibly the only active cryptocurrency trading APP in Hong Kong. We also encountered difficulties similar to other institutions applying for licenses, but ultimately overcame them through various efforts. So, this was not easy. We became the first truly dynamic institution in the market, and after a period of effort, we have accumulated to a relatively good state.
Secondly, we formed a team that can fight tough battles, which was also not easy. As I mentioned earlier, for a compliant exchange, the talent capability map required needs to understand both finance and Web3.
We quickly and organically integrated an operations team from Web3, a development team from internet giants, and a compliance finance team from Hong Kong. We found that it is very difficult to blend people from different backgrounds, especially teams with different cultural attributes, and then have everyone execute complex problems with the same culture or values, and finally get a good result.
We have seen multiple data indicators grow by more than 10 times. For example, the daily trading volume in December was in the hundreds of millions of dollars, which exceeded our expectations. Also, our fiat currency inflow and outflow grew by several tens of times. In August, through some operational activities, such as a relay race, we initially expected 30 professional investors, but ended up attracting several hundred professional investors to participate, which also exceeded our expectations.
Initially, it took several days for users to open an account on our exchange, but now we can complete all information filling within 10 minutes. Initially, we only had 5 trading pairs on our exchange, and now we have approximately 19 trading pairs.
Foresight News: What are your personal and HashKey Exchange's goals for 2024?
Livio: I hope that the exchange business will be quite substantial in 2024. Specifically, we hope to enter the top three licensed exchanges globally and become the leader in the compliant (cryptocurrency) track in the East, and continue to grow rapidly.
Foresight News: "Substantial" performance, in what specific aspects? For example, how many users are expected to be reached in 2024, revenue targets, and each major exchange has its own focus on ecosystem development. For example, OKX has been doing very well in wallets recently, Binance has been strong in developing public chains, and Coinbase has also supported the development of the Solana ecosystem. Can you also share these specific goals, as well as some specific personal goals?
Livio: We have very clear internal goals, but as business secrets, we may not directly disclose them. The second reason is that generally, the effects of a bull market often exceed people's expectations. The current design may deviate greatly from the initial version, so we mostly use it as a reference internally.
The Experience of a New Generation Cryptocurrency Exchange and Its CEO
Foresight News: Can you share your previous experience in the cryptocurrency field? After so many years in this industry, what are some things that have left a deep impression on you?
Livio: I have experienced three bull and bear cycles and have been involved in the cryptocurrency industry for over 10 years.
My personal choice has always been cryptocurrency exchanges. Whether now or in the future, I believe that cryptocurrency exchanges are the kings of the entire Web3 track's business model, so I will continue to delve into this track.
Foresight News: What are the essential requirements for becoming a CEO or core executive of a compliant cryptocurrency exchange in Hong Kong?
Livio: In the cryptocurrency industry in Hong Kong, it is a compliant industry regulated by the Hong Kong government. Generally, for a CEO or core executive, in addition to the appointment by the company's board of directors, they also need to obtain a license from the Securities and Futures Commission of Hong Kong to become a Responsible Officer (RO) of a financial institution. As a CEO, not only do you need to become an RO, but there is also a high probability that you will need to become an OMO.
To become an RO, you not only need to be familiar with the financial industry in Hong Kong and have experience managing cryptocurrency exchanges, but also need experience in investing in cryptocurrencies, solid experience in Web3, and an understanding of Hong Kong's laws and regulations. These conditions need to be met simultaneously, and I estimate that there are no more than 30 people who meet these requirements. Currently, it is quite difficult to recruit ROs in the market.
Foresight News: Will there still be a way out for unlicensed cryptocurrency exchanges in the future, as in the past?
Livio: Exchanges will all move towards compliance, and the difference lies in whether it is passive compliance or active compliance. HashKey Exchange represents active compliance, as do other exchanges applying for licenses.
What does passive compliance mean? It means that exchanges that have not actively laid out compliance businesses in the past few years are now being passively regulated by authorities. The U.S. SEC will send commissioners to supervise various behaviors of exchanges, which is passive compliance.
In fact, the two largest economies in the world are actively cracking down on non-compliant exchanges, and these non-compliant exchanges will be forced to comply. Countries like South Korea have also started imposing hefty fines on platform exchanges.
This is also because in recent years, the scarcity of liquidity has become the main situation in various countries due to the pandemic and the U.S. interest rate hikes. Each country is looking for non-compliant players in the liquidity-rich industry and squeezing out liquidity, which has become a trend and even escalated into a competition. In such a situation, all cryptocurrency exchanges will inevitably move towards compliance. Compliance is an inevitable result of history, and even the largest institutions may not be able to resist this inevitability.
More Directions in Cryptofinance: Stablecoins, RWA, and ETFs
Foresight News: The VASP license in Hong Kong has provided a clear answer to how cryptocurrency exchanges should develop. However, there are many other tracks in the cryptocurrency industry, such as stablecoins, which are considered to be as significant as the exchange business. What are your views on the market prospects of a Hong Kong dollar stablecoin? And once stablecoins appear in the Hong Kong ecosystem, what impact will they have on the ecosystem, and which institutions will emerge with interesting developments?
Livio: Yes, there are currently two particularly significant tracks. Earlier, we discussed that exchanges are the kings of the cryptocurrency industry's business model, and stablecoins are the "business model behind" or the queen behind the king. I share your judgment that these are two verified business models, and stablecoins have received widespread attention in the industry in recent years.
Regarding a Hong Kong dollar stablecoin, to be frank, we still have many questions. This is because stablecoins like USDT and USDC have been developed for many years and have a significant first-mover advantage. Compared to later stablecoins like TUSD and PUSD, stablecoins like USDT and USDC have a first-mover advantage.
The demand or fundamental value of stablecoins comes from the value of the base currency. The market prospects of a Hong Kong dollar stablecoin are closely related to the Hong Kong dollar itself, as well as the overflow value it brings as Hong Kong becomes a global digital economic center or supplier center. Because Hong Kong is a free port, there is a strong demand for internationalization of the Hong Kong dollar, so there is a certain market foundation.
Currently, the largest stablecoin, USDT, has a volume of over 90 billion USD. The currency supply of the Hong Kong dollar in December 2023 should be around 2 trillion Hong Kong dollars. A Hong Kong dollar stablecoin has the opportunity to give rise to a sufficiently large stablecoin market, mainly in the use cases of the Hong Kong dollar, such as for retail users of the Hong Kong dollar and local institutions. Globally, USDT still has a significant advantage.
Hong Kong hopes to become a global Web3 center, and to match this goal, it needs a certain degree of pricing power for mainstream virtual currencies, which requires infrastructure to help it fulfill this mission. From this perspective, it has a certain level of imagination and significance, but we need to wait and observe and judge the market for the next few years. Of course, there is still potential, and we are actively participating in the issuance of stablecoins.
Foresight News: You mentioned stablecoins, which are currently the largest application scenario for RWA. Since last year, the market has been paying a lot of attention to RWA. However, compared to Singapore, which has a clear RWA regulatory framework and regulations, Hong Kong currently does not have particularly clear regulations in this area. What are your views on the prospects of RWA, and which RWA asset issuances do you think have great potential?
Livio: This is a very forward-looking question. We have seen many institutions talking about doing RWA over the past year, but the actual effective participants in RWA may be very limited, and it is very likely that it is the main battlefield of cryptocurrency exchanges.
Because HashKey Exchange's license is an upgraded version of Type 1 and Type 7 licenses, this license itself can issue securities or security tokens. The basis for issuing RWA is legally compliant security tokens. Without a license, it would be an illegal issuance of securities, which is a criminal offense in various countries and regions. This means that RWA is inherently a story of licensed exchanges.
We are also actively laying out in this area, and currently, we are a leader in the industry. In addition to stablecoins, we are actively participating in the tokenization of financial products that have more liquidity and stronger real demand. This demand arises because due to the U.S. interest rate hikes, we have seen many old players in the cryptocurrency industry selling off their stablecoins before the next market cycle, or exchanging their USDT and BTC for USD, and then going to the USD market to purchase other financial products, such as U.S. bonds, and so on.
However, the emergence of RWA allows funds, after the end of the next bull market, to stay in the crypto market and participate in traditional financial markets through tokenized products of traditional financial products. This should be an important direction for us in the latter half of the bull market.
Recently, we have been exploring this direction through a cooperation with Huaxia Fund and are expected to enter the market in a period of time.
Foresight News: The Bitcoin spot ETF in the U.S. is currently the biggest hot topic in the industry. What are the differences between cryptocurrency ETFs in Hong Kong and the U.S.? And if a cryptocurrency ETF is approved in Hong Kong, what impact will it have on the cryptocurrency market and financial market in Hong Kong?
Livio: In the development of the Bitcoin spot ETF in the U.S., Coinbase has played a very important role. This includes custody services and the provision of a full set of infrastructure, including SSA (Supervisory Sharing Agreement).
Currently, the market for spot ETFs is experiencing a wave of enthusiasm, and HashKey, as a provider of infrastructure services, is playing a role in driving the development of the entire track.
Currently, these funds may first need to carry out underlying asset custody on licensed exchanges represented by HashKey, as well as provide them with trading, clearing, and other services. We have seen a very clear acceleration in Hong Kong's policies before the holiday season. Hong Kong hopes to closely follow the footsteps of the U.S. in the matter of cryptocurrency spot ETFs and not fall behind, because Hong Kong and the U.S. have a similar status as global financial centers.
We now see that regulators, including many traditional financial industry-related fund companies, are very active. The main participants in the Hong Kong Bitcoin spot ETF, have all established very practical and down-to-earth cooperation with us. Several companies that are currently vigorously applying for ETFs have chosen HashKey as their infrastructure provider, and even formed a consortium to apply for funds together.
We have entered a stage of practical implementation, and are currently in intense negotiations. Today, we also had meetings with two fund companies to discuss the details of the plan.
Foresight News: This is also a source of future revenue for licensed cryptocurrency exchanges, and what is the standard for custody fees for a Bitcoin ETF in Hong Kong?
Livio: I think the overall revenue structure may be similar to (Coinbase's). Coinbase has the largest market volume for custody services in the Bitcoin ETF sector in the U.S., and in the future, we may also form a similar effect and become a leader in our advantageous market.
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